Debt Income ratio on Home Mortgage
A home mortgage has been an age-old financial tool offered by different financial institutions. It can come in handy for those who are in need of immediate funding of an exorbitant amount. However, getting a home mortgage loan can be difficult even after having a steady source of income, paying all your debts and credit card bills on time and maintaining a good credit score. This is because obtaining a home mortgage loan highly depends on the debt income ratio. It plays an important role in getting the loan sanctioned. If you are not yet familiar with the term and various facets of it then don’t worry, we have got you covered. Below we have discussed the meaning and the key aspects related to debt income ratio and home mortgage.
Impact of date income ratio on home mortgage eligibility
You must already know how important it is to have a good credit score before applying for any kind of loan. Likewise, the debt income ratio is the most crucial parameter that banks use to evaluate your eligibility for a home mortgage loan. In common parlance, the debt income ratio is a measure of comparison between your current debts and monthly income. The current debts can include your monthly miscellaneous loan installments and credit card bills.
Types of debt income ratio
There are usually two types of debt income ratio which are given below.
Front end ratio
The front end ratio or the housing ratio is the gross amount for all the expenses related to your house divided by the income per month. These expenses can include house insurance, monthly installments of home loan, home maintenance fees and so on.
Back end ratio
The back end ratio is all the expenses related to your debt divided by your income per month. These expenses include your personal loan installments, four-wheeler loan EMIs, credit card bills and the likes.
The type of ratio lenders consider
The back end debt income ratio is always more than housing ratios and bank generally tend to check the back end ratio. It aids them in determining the creditworthiness of the potential borrower.
A good debt income ratio
Having a good debt income ratio is crucial in getting a mortgage loan sanctioned. That said, an ideal debt-income ratio is usually 36% or lower than that. Usually, for a credit score, you need to maintain high scores or numbers but for the debt-income ratio, it is just the opposite, the lesser the better. Thus if the ratio percentage is smaller the chances of getting the home mortgage loan go higher. Besides, lenders consider 43% as the upper ceiling for the debt-income ratio. If the percentage of the ratio is anything more than that you will not be eligible for a home mortgage loan.
Tricks to reduce your debt to income ratio
If you are having a high debt to income ratio and worried about getting a home mortgage loan then do not worry below we have listed some of the tricks that will help you keep your ratio within 36%.
Pay your loans before time
One of the main reasons for your high debt to income ratio can be having too many loans. If you can manage to foreclose a few of those before the scheduled date then it can significantly decrease your debt to income ratio.
Highest ‘bill to balance ratios’ should be your first target
Your main aim should be reducing the bill to balance ratios. Meaning, let us say you have two loans to pay at the moment one having an outstanding principal of 4 lakhs and the other having an outstanding principal of 3 lakhs with a monthly installment of Rs. 15000 and Rs. 25000 respectively. Then you need to foreclose the latter, as it will bring about a remarkable reduction in your monthly installment debts.
Negotiate for a salary hike
Getting a raise in your income can boost your debt income ratio. Try negotiating for a hike in salary with your employer or try fulfilling additional responsibilities to earn extra to meet your debt income ratio.
Do part-time jobs
If it is becoming extremely difficult to meet the debt income ratio then you can take up a side job. You can work for some additional hours at the weekend or extra hours after your job to make up for the required ratio.
Opt for a loan balance transfer
If you are paying high-interest rates for your current loans then you can transfer it to another bank that is offering lower rates of interest. In this way, you can significantly reduce your monthly debts which can eventually reduce your debt to income ratio.
Before you take the next step towards obtaining a home mortgage, evaluate your debt to income ratio carefully. You can use an online calculator to calculate your debt income ratio to guide you better.